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Investors were underwhelmed by the solid earnings posted by The Trade Desk, Inc. (NASDAQ:TTD) recently. We have done some analysis and have found some comforting factors beneath the profit numbers.
Check out our latest analysis for Trade Desk
Examining Cashflow Against Trade Desk's Earnings
Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.
Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. While it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.
For the year to December 2024, Trade Desk had an accrual ratio of -0.26. That indicates that its free cash flow quite significantly exceeded its statutory profit. To wit, it produced free cash flow of US$632m during the period, dwarfing its reported profit of US$393.1m. Trade Desk's free cash flow improved over the last year, which is generally good to see.
That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.
Our Take On Trade Desk's Profit Performance
As we discussed above, Trade Desk's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think Trade Desk's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And on top of that, its earnings per share have grown at an extremely impressive rate over the last three years. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. Case in point: We've spotted 1 warning sign for Trade Desk you should be aware of.